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Reinsurance sector maintains balance in wobbly market

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Overcapacity and limited losses continue to vex reinsurance markets, according to a report released Thursday by S&P Global Ratings, but the rating agency said it is maintaining its stable outlook on the sector as reinsurers strive to remain competitive.

In the report, “Déjà Vu All Over Again: Global Reinsurers Awake to Another Year of Declining Rates,” S&P says that the “length and depth of the current pricing decline,” is due “to a continuation of trends we have observed in many renewal periods so far: an abundance of reinsurance capacity and many years of modest insured losses.”

The New York-based rating agency also described competition as “fierce” in the face of “cheaper alternative capital sources,” which “crowd out the traditional players, especially in lines exposed to natural catastrophes.”

This combination of market trends has “put predictable downward pressure on pricing, which is testing reinsurers’ ability to source attractively priced risks and adapt to the environment.”

Reinsurers have responded with underwriting and capital discipline combined with enterprise risk management to weather the storm.

“Although a number of challenges still face the industry, we believe that reinsurers’ strong balance sheets and ERM practices will keep their creditworthiness stable in the next 12 months,” S&P said in its report.

Maintaining that discipline will be key to a continued stable outlook, S&P added.

“We are maintaining our stable outlook on the reinsurance sector, with its sophisticated enterprise risk management constructs, still-rational underwriting, and robust capital. However, any aggressive growth through underpricing — especially in the softer lines — while providing cheap capacity to cedents will likely trigger negative rating actions,” S&P Global Ratings credit analyst Taoufik Gharib said in a statement.